The end of a marriage has many costs: sometimes physical, obviously emotional and most definitely financial.
And when there are financial implications, there generally are tax considerations.
If alimony is part of the breakup equation, the spouse who receives it has to report that money as taxable income. But the ex who’s paying it gets to deduct the monthly contributions to the former husband or wife.
Usually.
But not in the case of one couple.
The IRS has determined in a letter ruling that one former husband forfeited the alimony deduction when the couple’s divorce decree was modified. It started out in the standard way; the ex-husband agreed to make regular alimony payments to his former wife until her death or remarriage.
But rather than deal with this disbursement for years, after the divorce was final the ex-husband asked for court (and ex-wife) permission to make a lump sum payment instead. The request was granted.
In doing so, however, the payoff was specifically structured (and so noted in the court documents) as a nontaxable event for both parties. That is, the settlement amount would not be taxable income for the ex-wife and it would not be a deductible payment by the ex-husband since it no longer was alimony but, in the words of the legal rejiggering, "payment … made for purposes of resolving the matters and issues of divorce between the parties."
The divorce court agreed, and now so does the IRS, noting that the tax agency’s decision relates to the tax code section pertaining to alimony: "Accordingly, such payment is not deductible to [the ex-husband] … ."
But, continued the IRS letter, "No determination is being made concerning whether the payment is includible in gross income or deductible from gross income with respect to any other provision of the Internal Revenue Code."
The bottom line: In divorce, as in any financial transaction, read all the paperwork carefully before signing.
The big picture message: Be careful what you wish for.
